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Two Actively Managed ETFs worth the Cost

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With rising geopolitical tension in Ukraine and the Middle East, the stock market will surely continue to struggle in the coming days. Chinese slowdown and concerns over the health of the European economy will also weigh on the broad U.S. equities.

Given the grumpy economic climate, it is difficult for investors to maintain a healthy portfolio. Here actively managed ETFs offer a far better option. This is because these funds are actively managed by a manager who uses various skills and attributes (like top-down approach, bottom-up approach, value investing, growth investing or absolute returns strategy) so that the fund outperforms the benchmark index even if the odds are against it.

These products are gaining immense popularity in recent years and generally perform well in a world torn by strife and uncertainties. Though these funds attempt to beat the market, they might underperform their passive counterparts as most fund managers fail to match the return of the indexes with that of the funds (read: Protect Your Portfolio with These Multi-Asset Income ETFs).

Additionally, investors often overlook these ETFs as they are expensive due to research expenses associated with the manager’s due diligence, and may not be popular or liquid too, which further inflates costs in the form of wide bid/ask spreads beyond the expense ratio. These funds also require daily portfolio disclosures, which could hamper their competitive portfolio composition.

While this is true in most cases, several active funds have managed to hold up quite nicely. There have been quite a few winners so far this year, leading to outperformance even after adjusting for expenses when these are compared to their well-known benchmark or index-tracking counterparts.

Below, we have highlighted three ETFs that could be interesting picks for investors considering a more active approach and seeking to target the growing aspects of the ETF industry with innovative strategies (see: all the ETFs Categories here).

This fund provides exposure to the large cap value segment of the U.S. markets by using a bottom-up stock selection approach. Here, the portfolio manager focuses on individual company fundamentals rather than a particular industry. This is easily done by investing in U.S. stocks with market capitalizations similar to the market capitalization of the companies in the Russell 1000 Index.

This strategy gives a portfolio of 38 stocks with financials as the top sector at 25% of total assets, closely followed by energy (17%), industrials (10%) and consumer staples (10%). With respect to individual holdings, Anadarko Petroleum (APC), Verizon (VZ) and Citigroup (C) occupy the top three positions in the basket and collectively make up for 12.22% share (read: Anadarko's Upbeat Guidance Puts These Energy ETFs in Focus).

The product has amassed $6.6 million in its asset base while it sees paltry volume of less than 2,000 shares a day. The ETF has 0.74% in expense ratio and has gained 7.9% so far this year. The return is much higher than its passive counterpart iShares Russell 1000 Value ETF (IWD), which added nearly 5.1% over the same period.

This ETF seeks long-term capital appreciation by investing at least 80% of its total assets in large-cap stocks that have above-average growth prospects. The inclusion of stocks in the fund also depends on their financial condition and management, including the competitive advantage, quality of balance sheet and earnings, growth prospects and potential for growth and stock price appreciation.

This approach results in a basket of 95 securities with the largest allocation going to Apple (AAPL) at 6.1%. Other firms hold less than a 2.7% share in the basket. From a sector look, the product has a slight tilt toward technology with a 29% share, followed by healthcare (18%) and consumer discretionary (16%) (read: ETFs to Watch on Apple Earnings Beat and Microsoft Miss).

With AUM of $2 million, the fund charges 82 bps in fees per year and trades in average daily volume of 2,000 shares per day. It gained 6.6% in the year-to-date time frame, well above the returns of 4.3% for the passively managed Vanguard Growth ETF (VUG).

The two ETFs and their comparison with the passively managed funds are summarized in the table below:

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